Feb. 28 (Bloomberg) -- Mt. Gox, once the world’s largest
Bitcoin exchange, filed for bankruptcy in Japan saying about
$480 million in Bitcoins belonging to its customers and the firm
were missing.

“The company believes there is a high possibility that the
Bitcoins were stolen,” Mt. Gox said in a statement.

The filing follows three weeks of speculation about the
fate of the Tokyo-based exchange, which suspended withdrawals on
Feb. 7. Since Bitcoins exist as bits of software, they can be
stolen if a hacker gains access to the computers and servers
used to run online exchanges, where the virtual currency can be
traded for dollars, euros and other currencies.

The turmoil left investors and entrepreneurs asking how the
insolvency could happen and how the fledgling Bitcoin industry
might bounce back.

“Mt. Gox is the only exchange that wasn’t backed by
venture funds or institutional investors,” Micky Malka, the
founder of Palo Alto, California-based Ribbit Capital and a
Bitcoin investor, said in an interview. “It will take time for
the rest of the Bitcoin ecosystem to prove that this is a bad
apple and not a problem of the entire ecosystem.”

Bitcoin was down more than 2 percent to $563.70 at 2:29
p.m. New York time, according to the CoinDesk Bitcoin Price
Index.

Bankruptcy Protection

Mt. Gox, which had revenue of 135 million yen ($1.33
million) in the year ended March, applied in Tokyo District
Court today for bankruptcy protection with debt exceeding assets
by 2.7 billion yen, the exchange said in a statement. Mt. Gox
lost 750,000 Bitcoins belonging to its customers and 100,000 of
its own, for a total of 850,000, the company said.

“We are in a situation close to what you would call
Chapter 11 in the U.S.,” Mark Karpeles, Mt. Gox’s chief
executive officer, said in an e-mail. Karpeles said his company
lost the Bitcoins because of weaknesses in its computer systems’
security measures.

Since Bitcoins exist as software, any computer or server
connected to the Internet that stores those files is vulnerable
to unauthorized access. Similar to a hacker copying e-mail, a
thief can steal the virtual currency by duplicating the digital
security key that lets a user spend it.

A standard method of keeping Bitcoins safe is to move the
digital money off a Web-connected computer, according to Andreas
Antonopoulos, chief security officer for Blockchain.info, a
company that hosts online wallets for Bitcoin storage. An
exchange or any other company handling large quantities of
Bitcoins could store the bulk of them on a computer or hard
drive that isn’t connected to the Internet, an arrangement known
as “cold storage.”

Cold v. Hot

Mt. Gox probably failed to properly manage its online and
offline Bitcoins, Antonopoulos said. Any individual or business
can protect Bitcoins by physically moving the software between
cold storage, and online, or hot storage, using flash drives.

“Cold storage is a combination of technology and
operational process,” Antonopoulos said in an e-mail. “They
got some part of that wrong.”

Bitcoin was introduced in 2008 by a programmer or group of
programmers under the name Satoshi Nakamoto and has since gained
traction with merchants around the world. The digital currency
has no central issuing authority, and uses a public ledger to
verify transactions.

Creditors Notified

Akio Shinomiya, a lawyer for Mt. Gox, said the court will
notify creditors identified by the exchange in its bankruptcy
filing. Other creditors will have to make a claim themselves,
and then the court would decide who gets repaid.

The company also set up a call center to answer customers’
questions about the bankruptcy.

Companies from San Francisco to London as well as the
virtual currency’s industry group, the Bitcoin Foundation, have
been seeking to assure Bitcoin users that their funds won’t
disappear due to theft or mismanagement.

U.S. and Japanese prosecutors have opened investigations
into events leading to the shutdown and bankruptcy of Mt. Gox,
and U.S. regulators are exploring options for increasing
regulation of virtual currencies.

The European Banking Authority, set up in 2011 to harmonize
banking rules across the 28-member European Union, said today
that it would set up a task force in the first half of this year
to review options for regulating Bitcoin and Bitcoin
derivatives.

U.S. Lawsuit

One Bitcoin user filed a proposed class-action lawsuit in
federal court in Chicago, seeking to represent U.S. customers
who lost money.

“This catastrophic loss has not only revealed the
instability of a burgeoning new industry, it has also uncovered
a massive scheme to defraud millions of consumers into providing
a private company with real, paper money in exchange for virtual
currency,” Illinois resident Gregory Greene said in the
complaint filed yesterday.

The case is Greene v. Mt. Gox Inc., 14-cv-01437, U.S.
District Court, Northern District of Illinois (Chicago).